Money plays a crucial role in society and creating wealth for your future. Some people have lots of money, but majority of people don’t have sufficient of it. If you make wise investment decisions early, you can enjoy good rewards in the future. Regardless of how old you are, it’s never too late to invest your money to be able to plan for financial hardships and fund your lifestyle. There’s no way to predict what will happen tomorrow. Impairments and accidents can make it difficult for you to earn money by traditional means. In this article, we discuss all you need to know about financial investment.
What exactly is an investment?
An Investment refers to committing money or other resources in the expectation of earning some benefits in the future. In a financial sense, investment is when you commit money to a security or financial asset, such as a bond or stock in the hopes of getting even more money later. The potential of earning more money later is the primary reason most people invest in the first place.
Most investors earn money via dividends, interest payments and appreciations. Dividends are paid to investors who buy shares in a company. Similarly, you are paid interest payments for the money you lend to government or a corporation, when you buy a bond. Appreciations occur when the original value of an asset has increased. For example, if you buy a collectible item for $100 and 10 years it’s 1,000, then the collectible has appreciated in value. We will go in depth about all of this below:
Investing VS Saving Money
You may have heard popular saying “A Penny Saved is a Penny Earned.” This saying is about saving money. Saving money enables you to keep it for a future use. For example, most parents save money to pay for their children’s education expenses. Money saved will not grow your wealth. Investing money, on the other hand, allows your money to grow to a larger sum. Investing money in financial market grows your wealth slowly over time.
Types of Investments You Should Know About
Financial market is a broad term that is used to describe any marketplace where buyers and sellers meet to trade their assets, such as bonds, equities, derivatives and currencies. Financial markets are characterized by transparent pricing, costs, fees and basic regulations. The prices that securities trade is determined by market forces.
Financial markets are found in all countries in the world. Some are very small, while others are huge online stock market investing, such as Forex markets and New York Stock Exchange (NYSE). There are two major types of financial markets: Capital markets and money markets.
Capital markets are the most followed markets. They are commonly used for long term assets that have maturities of greater than annually. Examples of capital markets include bond (debt) market and stock (equity) market. They are operated by institutions such as commercial banks, stock exchanges and all types of corporations, including mortgage banks and insurance companies to raise capital for long term purposes.
Money markets are usually assessed alongside capital markets. They are short-term investments usually less than a year. Examples of money markets include collateral loans, deposits, bills of exchange and acceptances. Institutions operating money markets include central and commercial banks, acceptances houses among others.
Passive Investing Vs. Active Investing
There are two major approaches to investing: Passive and Active. Passive investing entails matching market returns. Rather that picking stocks or timing the market, you manage your expected risks and returns by dividing your money up between the various types of investment. For example, you may choose to invest some into the U.S. bond, some into the international stock market and some into the U.S. stock market. Active investing involves using your skill to beat the market. You may do it by investing in companies that have strong long-term growth prospects. You can also do it by timing the ups and downs of the market and getting in and out that right time. The goal of active investing is to increase returns and reduce risks relative to the market as a whole.
Index investing is the process of building a passive investment strategy using index funds. Index funds are mutual funds that mimic a given market. For example, there are index funds that mimic the U.S. bond market, international stock market and the U.S. stock market. Index investors decide the best markets to invest in, how much of their money to put in each and utilize index funds to that plan in place.
Benefits of Index Funds
It’s Low Cost
One of the primary benefits of index funds is that they’re low cost. Lower costs lead to better returns. Index funds are the lowest cost investments available since you do not need to a pay a portfolio manager. Additionally, you will not incur all the trading costs, taxes and other expenses that come with other active strategies. Index funds are simple to operate. This simplicity keeps costs low and these cost savings can be invested too for a higher return.
Diversification means spreading your money into different types of investments rather than putting your eggs in one basket. Diversification in investment helps you to lower your risks without decreasing your expected returns. Since index funds entail investing in entire markets, they are an ideal to get the diversification you are looking for.
Sticking to your investment plan is one of the crucial things an investor can do. As the markets move up and down, there are some who are consumed with their greed or fear. Selling and buying on these emotions does not end well. The best investors stick to their plan regardless of what is going around them.
Index funds make it easy for you to stay consistent. All you will be doing is picking a few funds to track various markets. There is simply not all that much too tinker with. Index funds keep you right on tracking the same markets, so you don’t have to worry about some manager suddenly deciding to do something different, forcing you to change your investment plan.
There are many reasons why investment is crucial. Start investing some of your hard earned money for higher returns in the future. Remember to choose your investments wisely to avoid making huge losses. It is recommendable that you hire an experienced investment services provider, to help you decide the best way to go.